I've written about Brazil pre-Lula and post-Lula and spent the last five years covering all aspects of the country for Dow Jones, Wall Street Journal and Barron's. Meanwhile, for an undetermined amount of time, and with a little help from my friends, I will be parachuting primarily into Brazil, Russia, India and China. But will also be on the look out for interesting business stories and investing ideas throughout the emerging markets.

As Brazil Economy Comes To Life, Rate Hikes Near

After posting a weak 0.9% GDP in 2012, Brazil’s economy is finally on the mend. And as is usually the case in Brazil, when the economy is firing on all four cylinders, inflation rises and with it goes interest rates. Brazil’s historically low benchmark Selic interest rate of just 7.25% won’t survive April.

On Thursday, Brazil industrial production posted better than expected numbers for January, rising by 2.5% month over month, seasonally adjusted. (Consensus was 1.6%). That has Brazilian IP up 5.7% on the year, a whole lot better than the -3.5% IP print in December.

From a sector perspective, all of the major industrial production components gained momentum in January. Capital goods led the way up, showing an 8.2% gain (was -0.1% in December); durable consumption goods production grew 2.5% and intermediate goods moved up by 0.9%.

Drilling further into the activity breakdown, the strongest upside contribution to IP again came from auto production, machinery, and oil and gas refining, which grew monthly by 4.7%, 5.2% and 5.7%, respectively.

Even so, the IP growth trend looked at over a three year period lost some steam, down -0.1% from +0.1% in December and +0.8% in October. Already, preliminary data for February is suggesting a 1.7% drop in industrial production.

In all the January release indicates that the industry starts the year on a stronger note. Brazil might grow a whole 1% in the first quarter, Barclays Capital economist Marcelo Salomon said Thursday.

As a result of better than expected industrial production, the Central Bank has changed its dovish tone on interest rates, Salomon said.

But on Wednesday, the Bank’s Monetary Policy Committee, known as COPOM, did two things. They kept rates unchanged and hinted that would not be for long.

The COPOM statement eliminated any reference of maintaining rates constant for a prolonged period of time as the best strategy to attain convergence of inflation with the target band they’ve set for the economy. They’ve now stated that they will monitor the macroeconomic outlook preceding the next meeting (April 16-17) to decide its next monetary move.

“We think the change in the statement indicates that the decision to start hiking in April has already been made and that only a considerable downside surprise in inflation during the inter-meeting period would postpone the move,” Salomon said.

BarCap’s new Selic rate forecast now projects three consecutive 50 basis point hikes starting next month, which will push Brazil’s rate up to 8.75% by July. It’s still low by Brazilian standards, but bond and interest rate futures traders will be very busy in the weeks ahead in anticipation of the move.

The sudden swing to hawkishness, which emerged in speeches delivered since the January meeting, helped push the domestic yield curve up and bond prices down as markets started to price in higher rates in the future. Moreover, it reined in market inflation expectations, which hovered above 6% at the end of January and dropped to 5.74% in March. These are the biggest securities and derivatives markets in Brazil, more hotly traded than equities.

The Central Bank’s last Focus survey, published Monday, still showed consensus forecasting no hikes in 2013. And Salomon said he thinks the divergence of economists’ views from the market reflects the uncertainty driven by the monetary authorities’ sudden change in tone, and it is very likely that most economist were waiting for this decision to adjust their scenarios for the Brazilian economy.Brazil Equities Out Perform (YTD)As measured by the leading ETFs and mutual funds in the space.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.